How Do Banks Make Money on Fixed-Rate Mortgages?

Many times the bank to which you make your mortgage payment is not really the owner of your mortgage. You may have applied for your loan with a bank, closed it with the same bank and now make your payments to that bank, but that bank may no longer own your loan. Banks often sell mortgages to government-backed mortgage investors, such as Fannie Mae and Freddie Mac, without notifying the homeowners.

Origination

Banks charge origination fees on first-mortgage products, including fixed-rate loans. Origination fees are charged as points. A point is 1 percent of the loan amount. The origination fee is what the lender charges the homeowner for acquiring the loan. Processing fees and application fees are other fees lenders charge as a way to make money on a mortgage.

Underwriting

Another source of profit for a lender is the underwriting fee. Lenders charge the borrower a fee to underwrite the loan, whether fixed-rate or adjustable-rate. Homeowners pay the underwriting fee when the loan closes. If the lender denies the loan, or if the loan does not close, the underwriting fee is not charged.

Owning Loans

Banks that own loans collect interest as part of the monthly payment paid each month. A 30-year, fixed-rate loan's payment is mostly interest for the first 10 to 20 years. The total amount of interest due on a 30-year, fixed-rate loan often exceeds the original balance of the loan. This interest is the profit banks earn for lending the money.

Selling Loans

Banks usually cannot afford to keep every loan they provide. Often these loans are packaged into pools of similar loans and sold to investors. Fannie Mae and Freddie Mac, the nation's two largest government-sponsored mortgage investors, purchase mortgage loans from banks and other mortgage lenders and sell them as mortgage-backed securities (MBS) to investors on Wall Street. Banks receive additional money on top of the total loan amount when they sell loans to these companies.

Servicing Loans

Once Fannie Mae and Freddie Mac purchase these loans, the homeowners still send their payments to the original bank. Fannie Mae and Freddie Mac pay the bank a servicing fee for duties such as accepting the payments, reporting to the credit bureaus, providing customer service and managing the escrow accounts. This is why the company you send your payment to does not necessarily own the mortgage you are paying.

About the Author

David Rouse, currently residing in Raleigh, N.C., has been writing and teaching home owners about the mortgage industry since 1997. Rouse has written training manuals for mortgage professionals and conducted informational first-time home-buyer seminars, providing make-sense answers for a long and confusing process. He studied at Western Kentucky University.